Foreign Permanent Establishments of UK Companies: introduction: exempt profits or losses: calculation of exempt profits and losses
How to work out exempt profits and losses
The foreign branch exemption legislation does not operate by requiring a UK tax computation of the company’s worldwide profits and then subtracting the UK measure of the foreign branch profits. Instead, it operates by identifying components of what would (in the absence of CTA09/S18A) be the chargeable profits calculation that are (because of S18A) left out of account in calculating chargeable profits. Those components include notional capital allowances that are made automatically under S18C(1).
Profit of head office = 100, CAs 20, net taxable profits 80
Profit of branch = 50, CAs 30, net taxable profits 20
Total company profits for CT (80 +20) = 100
Under current tax and credit rules head office profits of 80 are taxable, the branch profits of 20 are also taxable with credit for overseas taxes.
Under branch exemption only the residual profits of 100 are UK taxable, less actual capital allowances 20 = 80, with the branch profits and notional allowances left out of account.
During the transitional period (see INTM284000 onwards and INTM285030) , the sum of the actual capital allowances and the notional capital allowances will give the appropriate total capital allowances. In the example above:
Total profits are 150 minus 20 actual CAs and minus 30 notional CAs = net profits of 100.
In accordance with CTA09/S18C(5), the election or claim made is assumed to be that which produces the largest reduction in profits/increase in loss, including where the company has made a claim or election on an alternative basis that would result in a smaller amount of allowances in that accounting period e.g. the election under CTA09/S730 for a fixed rate WDA of 4% in the Intangible Fixed Assets regime. (That applies equally to Capital Allowances - see INTM285020.) There is no requirement for the company to actually make the election or claim.